Did you know there will never be more than 21 million Bitcoins? Not one more, not one less. This is why Bitcoin is transforming into digital gold: the supply is limited.
As previously explained, miners on the blockchain are technically capable of minting an unlimited number of coins; therefore, how can Bitcoin preserve its 21 million token hard cap?
This is all due to a significant event called Bitcoin Halving, which occurs every four years.
How Is Bitcoin Halving Calculated?
The Bitcoin halving, or simply “the halvening,” is an event in which the Bitcoin supply is halved. This is a Bitcoin-exclusive process.
Bitcoins enter circulation as a result of miners that employ high-end hardware (such as ASIC miners) to solve challenging mathematical problems that connect the transaction blocks.
Bitcoin miners earn a “block reward” for each block of transactions they process, in addition to any transaction fees. As a result, when Bitcoin is halved, the block reward earned by miners is halved.
However, why would you do so? This can be traced back to Satoshi Nakamoto’s supply and demand theory-based stance on digital scarcity.
Nakamoto believes that through increasing Bitcoin’s scarcity, its value will increase.
This approach of creating scarcity contrasts sharply with the way fiat currencies operate, in which the federal government regulates inflation by fiscal and monetary policies, i.e. determining loan interest rates and the amount of money to create.
While fiat currencies such as the US dollar are inflationary in the long run, Bitcoin is the polar opposite; it is guaranteed to be deflationary as a result of Bitcoin halving.
How Is Bitcoin Split in Half?
Bitcoin is halved every 210,000 blocks mined or roughly every four years. No central authority determines the timing of halvening, as this would contradict the decentralized nature of blockchain technology.
The protocol for Bitcoin is already constructed in such a way that all miners agree to respect the rules.
The halvening process will be repeated until each block reward achieves the smallest unit of Bitcoin feasible, which is close to 0.00000001 BTC.
Around 18.7 million Bitcoins have been created to date and are currently circulating in the cryptocurrency market (though many millions are irretrievably lost). This is around 89 percent of the total Bitcoin supply.
Thus, there is little left to mine, which is all the more reason for Bitcoin Halving to occur: it reduces the number of block rewards obtained by miners, thereby slowing down the entire mining process.
Is Bitcoin’s Halving Beneficial or Negative?
As with the Olympics, Bitcoin halving occurs every four years and is thus a much-anticipated event—the Bitcoin Block Reward Halving Countdown website keeps track of the upcoming halving.
All previous Bitcoin halving events have been met with enthusiasm by both miners and investors, with the coin’s value rising following each halving event.
As a result, even if the amount of Bitcoins has been halved, miners will still be motivated to mine more because the value of Bitcoin has increased.
As lucrative as the halvening may sound, there is a disadvantage. On the eve of halving events, miners make massive preparations.
They invest significant sums of money (tens of thousands of dollars for some) in the most powerful mining hardware available.
This is because mining for Bitcoin grows more complex and time-intensive with each halving, necessitating miners to be equipped with the most powerful mining tools in order to continue working.
However, with block rewards halved, some miners may choose to abandon mining entirely due to prohibitively high computational and energy costs.
For instance, Nakamoto compared the mining process to the gold mine in the Bitcoin whitepaper:
The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
As a result, as additional Bitcoin halvings occur, mining BTC will get more difficult.
Bitcoin Price Halving Events in the Past
Each time a Bitcoin halving event occurs, it is a significant occurrence, which is why it is carefully chronicled. The following is a list of previous Bitcoin Halving events that occurred in the community, in chronological order:
This is the pre-halving phase of Bitcoin. The block reward threshold is 50 BTC.
2012: The initial halving takes place at block 210,000. Block rewards have been reduced to 25 BTC. The value of bitcoin increased from $12 to $1,207.
2016: Block 420,000 undergoes the second halving. Block rewards have decreased by 12.5 BTC. The value of bitcoin jumped from $647 to $19,345.
2020: The third halving takes place at block 630,000. Block rewards have been reduced to 6.25 BTC. The value of bitcoin increased from $8,821 to $63,558.
Naturally, other market movements throughout that time period had an effect on Bitcoin’s price. However, Bitcoin halving undoubtedly contributes significantly to Bitcoin’s parabolic price hikes and contributes to a bullish crypto market.
At this rate, the next halving will occur in 2024, when the total number of blocks hits approximately 840,000. By 2032, almost 99 percent of Bitcoins will have been mined, and block rewards will have decreased to 0.78125 BTC.
The final halving will occur in 2140 when no new Bitcoins may be produced and miners will be rewarded with only transaction fees.
While transaction fees now account for less than 10% of a miner’s block reward income, as we approach the year 2140, the percentage of transaction fees awarded to miners is projected to increase.
Nobody knows what will happen after all Bitcoins are discovered, but it is possible that Bitcoin’s blockchain protocol will have undergone dramatic changes by then, allowing for the introduction of a new method of mining Bitcoin.
Digital gold mining
Bitcoin halving is a significant event that causes much enthusiasm in the cryptocurrency community.
Bitcoin’s value skyrockets with each halving, which is truly a win-win situation for everyone concerned.
The very existence of such an event demonstrates that it is possible to create a scarce commodity in the digital world using blockchain technology, which has the potential to alter how we view and utilize money in the actual world.